Senate Democrats Introduce Bill to Tax Billionaires Assets

Ryan Morgan
By Ryan Morgan
November 30, 2023Politics
Senate Democrats Introduce Bill to Tax Billionaires Assets
Sen. Ron Wyden (D-Ore.), Chairman of the Senate Finance Committee, questions Internal Revenue Service (IRS) Commissioner nominee Daniel Werfel during his nomination hearing in Washington on Feb. 15, 2023. (Kevin Dietsch/Getty Images)

A group of 16 Democratic senators introduced a new bill on Thursday that would compel wealthy Americans to pay taxes on the unrealized gains of their capital assets every year.

Sen. Ron Wyden (D-Ore.) sponsored the legislation, which he dubbed the “Billionaires Income Tax Act.” In a one-page bill summary, Mr. Wyden said the legislation would apply to taxpayers with more than $100 million in annual income or more than $1 billion in total assets for three consecutive years, a class representing about 700 U.S. taxpayers, by his estimate.

Current tax laws provide no means for taxing an unrealized capital gain, which occurs when an asset’s estimated market value appreciates above its original purchase price but its owner has not yet sold off the asset and thus has not yet obtained its appreciated cash value.

Mr. Wyden’s bill proposes a marked-to-market accounting approach, whereby qualifying capital asset owners must annually report the current market value of tradeable assets like stocks, bonds, and other securities, and pay taxes on those assets. Those having to appraise their tradeable capital assets would have to pay annual taxes on gains and take deductions for losses.

For less liquid “nontradable” assets—which include real estate, yachts, certain business interests, fine art, and jewelry, and whose value is often subject to negotiation—Mr. Wyden’s bill requires qualifying taxpayers to pay regular taxes on the sale of these assets, along with a “deferral recapture amount,” which amounts to an interest fee for the years they held the asset. Those selling such assets would calculate this “deferral recapture amount” by “allocating an equal amount of gain to each year the billionaire held that specific asset, determining how much tax would have been owed on the gain in each year, and assessing interest on unpaid tax for the time the tax was deferred.”

In cases where a person’s assets rise in value enough that they would fall under the scope of the “Billionaires Income Tax Act,” they would be allowed to pay the resulting tax over five years.

First-time billionaires may also elect to treat up to $1 billion of tradable stock they may own in a single corporation as a nontradable asset. This, the bill’s one-page summary explains, “will help to ensure that the proposal does not affect the ability of an individual who founds a successful company to maintain their controlling interest.”

Sens. Debbie Stabenow (D-Mich.), Bob Casey (D-Pa.), Sheldon Whitehouse (D-R.I.), Elizabeth Warren (D-Mass.), Brian Schatz (D-Hawaii), Mazie Hirono (D-Hawaii), Tammy Baldwin (D-Wis.), Sherrod Brown (D-Ohio), Jeff Merkley (D-Ore.), John Fetterman (D-Pa.), Tina Smith (D-Minn.), Peter Welch (D-Vt.), Jack Reed (D-R.I.), Ed Markey (D-Mass.), and Bernie Sanders (I-Vt.).

In a Thursday Senate floor speech, Mr. Wyden said the tax code changes he’s proposing would close a favored asset management strategy of wealthy Americans he dubbed “buy, borrow, die.” He explained that this strategy entails wealthy Americans borrowing against the value of their unrealized capital assets to “support a lavish lifestyle” and then passing their assets on to their family members who can continue along with the same asset management strategy.

“Teachers and firefighters shouldn’t be paying higher tax rates than the ultra-wealthy. It’s that simple,” Mr. Whitehouse said in support of the legislation. “Our legislation will level the playing field by closing tax loopholes to ensure the highest earners pay their fair share in taxes.”

Wyden Tax Plan Poses Challenges

Mr. Wyden previously raised the possibility of taxing unrealized capital gains back in 2021. His initial proposals were met with questions and criticisms.

U.S. Chamber of Commerce senior economist Curtis Dubay raised concerns about the idea at the time, telling the Washington Examiner that it could stifle capital markets, discouraging companies from going public.

Mr. Dubay explained that average middle-class investors are unaccredited and therefore limited in their ability to invest in non-public companies.

“The fewer IPOs, the fewer public companies, the more that those who are able to tap those markets will do so, leaving the public to invest in an increasingly shrinking pool of public companies,” Mr. Dubay said at the time.

Tax Policy Center Senior Fellow Steven Rosenthal also said Mr. Wyden’s past proposals for a wealth tax pose challenges.

“While only a few taxpayers would pay the new tax, many more would need to value all their assets annually, including their privately-held businesses,” Mr. Rosenthal wrote in an October 2021 assessment of Mr. Wyden’s plan. “Taxpayers close to the line might move in and out of the new tax regime frequently. How would the IRS determine whether all billionaires filed properly? Publicly-traded stock may seem easy to value, but what about large blocks, which might be impractical to sell? How would the IRS settle disputes over valuations?”

Mr. Rosenthal also raised concerns about capital asset owners who have little actual cash on hand to cover the new tax burden raised by annually taxing their unrealized capital gains.

“What if the billionaire is stock rich but has little cash to pay the tax? Or is unable to borrow large sums to pay the tax?” he wrote.

Such a tax on unrealized capital gains could also face legal problems. The 16th Amendment of the U.S. Constitution allows for an income tax, but it’s not clear that unrealized capital gains counts as income.

“I would characterize the landscape here as a lot of uncertainty about whether or not this would pass constitutional muster,” Tax Foundation senior policy analyst Garrett Watson told CNBC in 2021.

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